Unrealistic Expectations

Routine breaching of records by the stock market makes one wonder whether this even has any significance in the long run. Although, BJP’s prime ministerial candidate Narendra Modi is being touted as the reason for this surge, the greater relief is the possible ousting of the corrupt UPA-II regime and its weak governance.

While this surge may serve as an indicator of a favourable economic future, stock markets are not always a reliable indicator for the popularity of economic policies as it is difficult to evaluate policies that may be implemented by the new government.

The popular view is that markets are largely driven by foreign institutional investors who alone pumped in about Rs. 80,000 crore last year. As a result, India is heavily dependent on them to bridge its account deficit. On the other hand, if India is seen as a less favourable destination, cross-border flows might reverse.

The feared “tapering “ of the U.S. Federal Reserve might again cause a reverse flow as investors seek greener pastures in a fast-improving U.S. economy.

The larger point is not to minimise the role of FIIs and neither is it wise to count the quantum of such flows as a huge positive.

A report has indicated that centre’s inaction has affected only about one fourth of the infrastructure projects, and the rest by over capacity, balance-sheets or state governments.

The markets might move down quickly, but India’s economic fundamentals will not rise dramatically in the short-term as there is only a 50 % chance that India’s GDP (gross domestic product) will average even 6.5 % over the next five years provided there is a decisive mandate.

The striking points of the revival plan are a more flexible labour policy and deteriorating fiscal situation requiring tough discipline.

Cutting down on subsidies and the adoption of a Direct Taxes Code, which has been in the pipeline for a long time, may turn out to be difficult.

The Goods and Services Tax (GST) calls for a greater consensus among political parties.

The new government will be tallied in terms of deliverance of the large looming expectations and not just the stock market.